Question:
Consider a large farm whose operations affect the pollution levels in a small lake. Suppose there is a cluster of 10 independently-owned restaurants that each have an outdoor seating area next to the lake. The higher the level of production on the farm, the more polluted and foul-smelling the lake gets, which means that fewer customers want to dine at those restaurants. As such, there is a direct conflict between the activities on the farm and the profitability of the restaurants. Answer the following questions in the text box below. b) In this scenario, the lake has two competing uses: it can be used as a sink to collect agricultural runoff and it can be used as a scenic backdrop for waterfront dining. What does the Coase Theorem tell us about how the conflict over the use of the lake could be resolved?